SUMMARY: As part of the FDIC's systematic review of its regulations and
written policies under section 303(a) of the Riegle Community
Development and Regulatory Improvement Act of 1994, the FDIC is
revising its Statement of Policy on ``Applications for Deposit
Insurance.'' These revisions include changes to the FDIC's policies
regarding initial capitalization when a de novo bank is organized by
certain well managed and well capitalized holding companies. Policies
regarding stock benefit plans are amended and regional directors are
given more discretion to act under delegated authority. Changes are
also made to provide guidance for proposed depository institutions
which would be owned by domestic governmental units, to eliminate
outdated information, and to reflect current polices and practices that
have not previously been incorporated into the Statement of Policy.

SUPPLEMENTARY INFORMATION: This Statement of Policy is a revision of
the FDIC's Statement of Policy Regarding Applications for Deposit
Insurance adopted on April 13, 1992 (57 FR 12822) (the "1992 Statement
of Policy"). Section 303(a) of the Riegle Community Development and
Regulatory Improvement Act of 1994 (CDRIA) (12 U.S.C. 4803(a)) requires
the FDIC to streamline and modify its regulations and written policies
in order to improve efficiency, reduce unnecessary costs, and eliminate
unwarranted constraints on credit availability. Section 303(a) also
requires the FDIC to remove inconsistencies and outmoded and
duplicative requirements from its regulations and written policies.
Pursuant to this statute, the FDIC published a proposed Statement of
Policy on "Applications for Deposit Insurance" in the Federal
Register on October 9, 1997 (62 FR 52869). The proposed Statement of
Policy was published in conjunction with a notice of proposed
rulemaking in the Federal Register on October 9, 1997 (62 FR 52810)
which would amend 12 CFR part 303 (and other FDIC regulations),
including subpart B, concerning the procedures for an applicant to
follow in applying for deposit insurance. In connection with the
publication of this Statement of Policy, the FDIC has published a final
rule amending part 303 (and other FDIC regulations) elsewhere in
today's Federal Register.
Eleven commenters submitted comments in response to the proposal.
The FDIC has carefully considered these comments. The comments are
summarized below in the discussion of significant changes to the
Statement of Policy.

Initial Offering of Stock

The proposed Statement of Policy provided that all stock of a
particular class in the initial offering should be sold at the same
price and have the same voting rights. Insiders are generally not
permitted to acquire a separate class of stock with greater voting
rights. Moreover, insiders should not be offered stock at a price more
favorable than the price for other subscribers.
One commenter objected to these provisions on the basis that
potential investors are adequately protected by the disclosure
provisions of the federal securities laws and the ``fairness''
provisions of state securities laws. Moreover, the commenter argued
that such unnecessary restrictions discourage investment in new
depository institutions.
The FDIC continues to believe that these restrictions are
appropriate. Price disparities or greater voting rights provide
insiders with a means to gain control disproportionate to their
investments. Furthermore, allowing insiders to purchase stock at a
discount provides an immediate appreciation of the insiders'
investments resulting from the mere establishment of the depository
institution without regard to the institution's financial success and
without greater risk to the insider than that borne by other investors.
Such arrangements may encourage the formation of depository
institutions for speculative purposes. The Statement of Policy
specifically discusses the use of options as a means of compensating
insiders for money placed at risk during the organization phase, as
compensation for services rendered, and as a reward for contributions
to the success of the enterprise. Such arrangements differ
significantly from "cheap stock" in that an individual will benefit
from options granted with a strike price of fair market value at the
time of issuance only if the institution is financially successful.
Therefore, these provisions have been adopted as proposed.

Wholly Owned Subsidiary of a Holding Company

The 1992 Statement of Policy required an initial capitalization in
an amount that is sufficient to provide at least an 8% Tier 1 leverage
capital to total assets ratio at the end of the third year of
operation. The proposed Statement of Policy provided that, in certain
circumstances, the amount of the initial capital injection for a de
novo institution may be reduced to a minimum of $2 million or an amount
that is sufficient to provide an 8% Tier 1 leverage capital ratio at
the end of the first year of operation, or sufficient to meet any
minimum standards established by the chartering authority, whichever is
greater. This option would be available when the proposed depository
institution is to be formed as a wholly owned subsidiary of a holding
company which meets the standards established for an ``eligible holding
company,'' as set forth in Sec. 303.22 of the FDIC's regulations. The
holding company would also be required to provide a written commitment
to maintain the proposed depository institution's Tier 1 leverage
capital ratio at no less than 8% throughout the first three years of
operation. This revision would allow a well-managed holding company to
provide less initial capital than would have been required under the
former standard. This change is considered appropriate in recognition
of the FDIC's ability to reasonably quantify the financial capacity of
the parent organization, and to allow the holding company to more
efficiently allocate the resources of the entire organization. This
amendment will permit the appropriate FDIC regional director (DOS) to
act on proposals that contain these provisions when the other factors
necessary for delegated authority have been met.
One commenter suggested that the required capital level for a de
novo institution be well capitalized, rather than an 8% Tier 1 leverage
capital ratio, with the agency retaining authority to require a higher
amount. The FDIC believes that a de novo institution requires a higher
level of capitalization during its formative years than does a

[[Page 44753]]

mature institution with an established record of sound performance.
Accordingly, the FDIC has not adopted the commenter's suggestion and
these provisions have been adopted as proposed.

Operating Insured Offices

In certain instances, the proposal allowed the applicant to request
that the benchmark for evaluating the adequacy of capital be such that
the proposed depository institution would be classified as well
capitalized, as defined by its primary federal regulator. This option
would be available when the proposal involves the formation of a
depository institution through the acquisition of an existing insured
operating office (or offices). Criteria established for this lower
initial capital benchmark are that the acquisition involves
substantially all of the assets and liabilities of the operating
insured office, that the applicant provides reasonable evidence that
the de novo institution's operations will be stabilized at inception,
and that the proponent for the applicant is either an eligible holding
company or an established banking group. The proposed Statement of
Policy used an identified chain banking group as an example of one type
of ``established banking group.'' The term also is intended to cover a
group of individuals who have served as directors or officers of an
operating insured depository institution. For either a chain banking
group or a group of individuals to be considered an established group,
the association must be in existence for at least three years. This
provision had been added in recognition that deposit insurance for a
depository institution being established from operating offices does
not present the same risks to the insurance funds as does the
chartering of a true de novo institution. This provision sought to
remove capital requirement inequities that may have existed under prior
procedures with respect to certain corporate reorganization activities.
This amendment would also permit the appropriate FDIC regional director
(DOS) to act on proposals that contain these provisions when the other
factors necessary for delegated authority have been met. Two commenters
stated that they did not object to this provision and it has been
adopted without change from the proposal.

Stock Financing by Directors, Officers, and 10% Shareholders

The proposal revised guidelines for borrowing limitations by
directors, officers, and 10% shareholders to finance their purchases of
stock in the proposed institution. The 1992 Statement of Policy
provided that direct or indirect borrowings by an individual insider of
more than 75% of the purchase price of the stock subscribed, or more
than 50% of the purchase price of the aggregate stock subscribed by
directors, officers, and 10% shareholders as a group, is presumed to be
excessive. The 1992 Statement of Policy has been amended by deleting
the statement that borrowing arrangements in excess of the referenced
percentage limits will ordinarily be presumed to be excessive; however,
borrowing arrangements would still be carefully reviewed. The burden of
providing appropriate information supporting borrowing arrangements
will remain with the affected insiders. This amendment would permit the
appropriate FDIC regional director (DOS) to evaluate all insider
borrowing arrangements on their own merits, without having a set limit
for those that will be considered excessive or otherwise inappropriate.
This amendment also would permit the appropriate FDIC regional director
(DOS) to act on the proposal when insider borrowing arrangements are
not detrimental to the institution if the other factors necessary for
delegated authority have also been met.
Similarly, borrowings by a holding company to capitalize a proposed
depository institution would be evaluated in the context of the holding
company's consolidated operations, rather than basing such evaluation
on a 50% limit of the total initial capital of the proposed depository
institution. The borrowing arrangement would need to meet any leverage
guidelines established by the holding company's primary federal
regulator and be reasonable. This amendment will permit the appropriate
FDIC regional director (DOS) to act on a proposal that involves holding
company debt financing of more than 50% when the other factors
necessary for delegated authority have been met. Three commenters
specifically endorsed this portion of the proposal and the FDIC adopts
these provisions as proposed.

Stock Benefit Plans

The proposed Statement of Policy recognized that it is becoming
increasingly common for organizers of de novo depository institutions
to propose stock benefit plans. Such plans often include not only
active officers, but also directors and, in some cases, incorporators
or organizers (collectively, "incorporators"). The proposed Statement
of Policy provided for participation of active officers, outside
directors, and incorporators in stock benefit plans.
The proposal provided that stock benefit plans must be fully
disclosed to all potential subscribers and a description of any such
plans must be included in an application for deposit insurance. Stock
benefit plans should encourage the continued involvement of the
participants and serve as an incentive for the successful operation of
the institution. The proposed Statement of Policy further indicated
that stock benefit plans should contain no feature that would encourage
speculative or high risk activities, or serve as an obstacle to or
otherwise impede the sale of additional stock to the public.
Guidelines were included in the proposed Statement of Policy as
standards to be used in evaluating the appropriateness of stock benefit
plans. These guidelines were intended to provide the applicant with
basic guidance and to promote consistency within the FDIC itself. Some
concepts were retained from the 1992 Statement of Policy, such as a
maximum 10-year limit on options. The FDIC's practice of requiring that
the exercise price be established at no less than fair market value at
the time of the grant was explicitly stated. New concepts were added
which emphasize that the plan should encourage the continued
involvement of the proposed management. A vesting period covering the
first three years of operation would be appropriate to assure continued
involvement. A three-year vesting period was selected based on the
FDIC's experience that a three-year period provides reasonable
assurance that the business plan will have been fully implemented and
stabilized operations achieved. An additional requirement was that a
stock benefit plan provide for an exercise or forfeiture clause which
may be invoked by the depository institution's primary federal
regulator in the event the capital falls below minimum requirements.
This was considered necessary to ensure that the dilutive effects of
outstanding stock options will not make it unduly difficult for
institutions in need of additional capital to increase capitalization
in a timely manner.
The proposed Statement of Policy indicated that the FDIC will
separately review stock benefit plans established to compensate
incorporators who have placed personal funds at risk to finance the
organization of the institution or who have provided professional
services in conjunction with the organization. Since these plans were
envisioned as compensating

[[Page 44754]]

incorporators for services already rendered, vesting or restrictions on
transferability were not required.
The proposed Statement of Policy also provided that stock
appreciation rights and similar plans that involve a cash payment based
directly on the market value of the depository institution's stock are
specifically identified as objectionable. These types of plans can
result in an expense which would reduce the depository institution's
capital. Such compensation plans cannot be quantified in relation to
the capital adequacy factor and could be detrimental to the overall
capital of a depository institution, particularly in its formative
years. The proposed Statement of Policy also provided that stock
benefit plans offered by de novo holding companies in conjunction of a
new depository institution will be reviewed in the same manner as if
the plan were being established by the proposed depository institution.
The FDIC received five comments in response to the stock benefit
plan provisions of the Statement of Policy. The comments were generally
supportive of the changes. However, three commenters raised specific
concerns.
Stock appreciation rights and similar plans that involve a cash
payment based directly on the market value of the depository
institution's stock were deemed to be unacceptable. Two of the
commenters questioned this prohibition. The FDIC continues to believe
that these types of plans tend to reduce the depository institution's
capital in contrast to option plans which infuse capital into the
institution. This is particularly objectionable in the formative years
of a new depository institution when there is often a need to preserve
capital during a period of rapid growth and operating losses. One
commenter suggested that there could be a requirement to reinvest all
cash received in new stock. The FDIC believes this would be the
functional equivalent of a grant of stock and has not adopted the
suggestion or changed the proposal with respect to this issue.
One commenter questioned the FDIC's authority to impose the
criteria concerning stock benefit plans upon a proposed de novo holding
company. The FDIC believes it has such authority under section 6 of the
Act, 12 U.S.C. 1816, which authorizes the FDIC to consider the general
character and fitness of the management of the depository institution.
Good management will not commit the depository institution, directly or
indirectly, to excessive compensation of insiders. Many de novo
institutions are organized as subsidiaries of holding companies whose
only substantive function is to own the stock of the proposed
institution. Without the ability to set standards for stock benefit
plans sponsored by de novo holding companies, the FDIC's requirements
concerning stock benefit plans could easily be avoided by organizing a
holding company. The FDIC has adopted this aspect of the proposal
without change.
The proposed Statement of Policy did not place limits on the volume
of options or warrants that could be issued to directors, officers or
incorporators. The Statement of Policy contemplated the FDIC reviewing
the volume of options or warrants granted on a case-by-case basis. The
FDIC received no comments on this matter. However, since the
publication of the proposed Statement of Policy, the FDIC has received
a number of applications for deposit insurance contemplating stock
benefit plans in which the volume of options granted to organizers went
well beyond what the FDIC believed was reasonable. In light of this
recent experience, the FDIC now believes that guidance should be
provided regarding how the FDIC will determine if the volume of options
or warrants granted is acceptable.
The FDIC has now adopted the following standards in the Statement
of Policy for evaluating the volume of options or warrants to be
granted:

Stock benefit plans granted to active officers and
directors will be reviewed as part of the total compensation package.
The Statement of Policy does not place definite limits on stock benefit
plans for such individuals.

In reviewing stock benefit plans granted to incorporators,
FDIC will review the individual's financial commitment, time,
expertise, and continuing involvement in the management of the proposed
financial institution. Plans to compensate incorporators that provide
for more than one option or warrant for each share subscribed will
generally be considered excessive. It is further expected that
incorporators granted options or warrants at or near this level will
actively participate in the management of the depository institution as
an executive officer or director. On a case-by-case basis, the FDIC may
not object to additional options being granted to an incorporator who
will also be a senior executive officer.

In those limited situations where individuals who
substantially contribute to the organization of a new depository
institution do not intend to serve as an active officer or director
after the institution opens for business, the FDIC will generally not
object to such individuals receiving stock options or warrants under
certain circumstances. Specifically, organizers who agree to accept
shares of bank stock as payment for funds placed at risk during the
organization phase or in payment for professional services rendered may
receive options or warrants of up to an equal number of shares
received. When continuing service is not contemplated, the FDIC will
not require vesting or restrictions on transferability, but will review
the duration of the rights, exercise price, and exercise or forfeiture
clauses.
It is believed that these standards allow incorporators of de novo
institutions flexibility to design reasonable compensation programs to
reward those who have placed money at risk and to incent directors and
officers to promote the best interests of the institution, consistent
with safe and sound banking practices.

Applicants Owned by Domestic Governmental Units

The FDIC specifically solicited comment in the proposal on whether
deposit insurance should be conferred upon certain applicants that are
owned or controlled by public entities, specifically domestic
governmental units. The FDIC stated in the proposal that it was
concerned that due to their ownership by a governmental unit, such
depository institutions presented unique supervisory concerns that do
not exist with privately owned depository institutions. The FDIC noted
its uncertainty about such an institution's ability to operate
independently of the political process, the institution's ability and
willingness to raise capital in the equity markets, management
stability and business purpose. The FDIC stated that in light of these
concerns, the agency would review an application for deposit insurance
filed by a domestic governmental unit very closely and that the FDIC
was unlikely to resolve favorably all of the statutory factors which
must be considered under the FDIC's implementing statute.1
See 62 FR at 52871 (October 9, 1997).
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\1\ A distinction was made, however, for banks owned by foreign
governments and their subdivisions and banks owned and controlled by
Native American tribes or bands. Banks that are owned by foreign
governments and their subdivisions are entitled to ``national
treatment.'' (See International Banking Act of 1978, 12 U.S.C. 3101
et seq.). National treatment requires that all foreign depository
institutions, whether publicly- or privately-owned, receive
consistent treatment with domestic entities when operating in the
United States. This includes eligibility for deposit insurance which
is often a condition of either a state or federal charter. Native
American tribes or bands that own or control depository institutions
can also be distinguished from a conventional governmental unit that
seeks to open or acquire a depository institution. This is because
under federal law, Native American tribes and bands function as both
governmental and economic, for-profit entities. The Indian
Reorganization Act of 1934 (the IRA) (25 U.S.C. 461 et seq.)
authorizes not only the creation of tribal governments (see section
16 of the IRA, 12 U.S.C. 476), but also provides for the creation of
tribal business corporations pursuant to section 17 of the IRA (25
U.S.C. 477). At the same time, however, a tribal government
organized under section 16 of the IRA is not precluded from engaging
in business activities. See S. Unique Ltd. v. Gila River Pima-
Maricopa Indian Community, 138 Ariz. 384, 674 P.2d 1376 (Ct. App.
1984). These legal and policy considerations unique to these two
categories of insurance applicants outweigh any concerns that the
FDIC may have regarding the ownership of such depository
institutions by governmental entities.

The FDIC received seven comments in response. Three were from
organizations (both public and private) that provide low- and moderate-
income housing in various areas of the country; two were from banking
trade associations; one was from the trade association for local
housing finance agencies; and one was from a member of the U.S. House
of Representatives. Five commenters were opposed to the addition of
language to the statement of policy concerning deposit insurance
applications from a domestic governmental unit. The two other
commenters agreed that the FDIC has legitimate concerns about providing
deposit insurance to depository institutions owned by governmental
units, but argued that it would still be best to have one application
procedure for all applicants.
One of the most common criticisms of the positions taken in the
preamble to the proposal is that it amounts to ``effective preclusion
of ownership and operation of a depository institution by a public
entity.'' The commenters further argued that a bank owned by a
governmental unit seeking deposit insurance from the FDIC presents the
same issues as any other applicant for deposit insurance. They noted
that the criteria for the review of a deposit insurance application are
specified by the FDIC's implementing statute and that the FDIC may not
exceed those criteria or apply them differently to an applicant owned
by a governmental unit.
Two commenters agreed with the FDIC that applications from
depository institutions owned by public entities pose special concerns
and should be carefully scrutinized. They recommended that notices of
such applications be published in the Federal Register to ensure that a
broad audience has the opportunity to comment on these applications.
In response to the comments on the positions taken in the preamble
to the proposal, the FDIC emphasizes that it has no intention of
exceeding the enumerated statutory criteria for evaluation of a deposit
insurance application, nor does the agency propose to apply different
standards among deposit insurance applicants. However, the FDIC notes
that because of their ultimate control by the political process, such
institutions could raise special concerns relating to management
stability, their business purpose, and their ability and willingness to
raise capital (particularly in the form of true equity rather than
governmental transfers). On the other hand, such institutions may be
particularly likely to meet the convenience and needs of their local
community, particularly if the local community is currently un- or
under-served by depository institutions. In view of such considerations
and the policy issues they embody, the FDIC will closely evaluate such
applications to ensure that the required statutory factors are met.
With respect to the recommendation from commenters that notices of
deposit insurance applications from institutions which would be owned
by governmental entities be published in the Federal Register for
comment, the FDIC notes that all applications which are subject to the
requirements of the CRA (this includes deposit insurance applications)
will be listed on the FDIC's Internet home page. In addition, the FDIC
is considering whether to specifically solicit comment on such matters
as insurance applications from institutions which would be owned by
governmental entities, either on the Internet or by publication in the
Federal Register.

Other Changes

Other changes from the 1992 Statement of Policy included in the
proposal are as follows:

In conjunction with the FDIC's recent rescission of its
Statement of Policy regarding Applications, Legal Fees, and Other
Expenses (62 FR 15479, April 1, 1997), the proposal included comments
relative to fees incident to an application.

The proposed Statement of Policy replaced the requirement
that "no dividends are to be paid until all initial losses have been
recaptured . . ." with "during the first three years of operation,
cash dividends shall be paid only from net operating income (after tax)
. . ." The proposed Statement of Policy also retained the requirement
that no dividends be paid until an appropriate allowance for loan and
lease losses has been established and overall capital is adequate. This
amendment was designed to provide reasonable accommodation to possible
Subchapter S corporation applicants.

The 1992 Statement of Policy was revised to authorize the
appropriate FDIC regional director (DOS) to waive submission of
financial information for proposed officers and directors when the
proposed depository institution is being formed as a wholly owned
subsidiary of a holding company. This was proposed in recognition that,
when the proposed depository institution is being formed as a wholly
owned subsidiary of a holding company, personal financial information
may not be meaningful.

The 1992 Statement of Policy was also amended by deleting
the statement that the chief executive officer is expected to be a
qualified and experienced lending officer. It is expected that a
qualified lending officer will be provided for in the management
structure; however, the chief executive officer need not be that
person.

The proposal deleted the requirement that a majority of
the proposed directors will reside within, or have significant business
interests within 100 miles of the proposed depository institution.
While the FDIC encourages local involvement in proposed depository
institutions, a specific residency requirement was not considered
necessary.

The 1992 Statement of Policy was also revised to require
that the applicant commit the depository institution to obtain an audit
by an independent public accountant annually for only a three-year
period, rather than the first five years.
No commenters objected to these provisions and they have been
adopted as proposed.
An additional minor change, not included in the proposal, has been
added to the Statement of Policy. Under the discussion of the statutory
factor "Consistency of Corporate Powers with the Purposes of the Act"
a statement has been added which indicates that generally the FDIC will
presume that a proposed national bank's or federal savings
association's corporate powers are consistent with the purposes of the
Act. The 1992 Statement of Policy and the proposal only addressed this
statutory factor as it applied to insured state banks and state savings
associations. The added provisions clarify the FDIC's position with
respect to national banks and federal savings associations.
This Statement of Policy is applicable only to applications for
deposit

[[Page 44756]]

insurance, and it is not intended to establish policy for other
applications or actions undertaken by established operating insured
depository institutions.
The Board of Directors of the FDIC has adopted the following
Statement of Policy on Applications for Deposit Insurance:

FDIC Statement of Policy on Applications for Deposit Insurance

Introduction

The Board of Directors of the FDIC is charged by statute with the
responsibility of acting on applications for federal deposit insurance
by all depository institutions 1 including any national
bank, district bank, state bank, federal savings association, state
savings association, savings bank, or trust company. In addition, the
Board of Directors also will act on applications for federal deposit
insurance by an industrial bank (or similar depository institution
which the Board of Directors finds to be operating substantially in the
same manner as an industrial bank), or any other depository institution
which is engaged in the business of receiving deposits, other than
trust funds.
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\1\ Certain exceptions to the statutory requirement that deposit
insurance for all depository institutions be acted on by the FDIC
are identified in section 5 of the Act, 12 U.S.C 1815. For example,
federally-chartered interim institutions are deemed to be insured
depository institutions upon the issuance of the institution's
charter by the appropriate federal agency. Under section 5(a)(2) a
federally-chartered interim institution is a federally-chartered
depository institution that will not open for business. An
application for federal deposit insurance generally is not required
for such an institution even if the federal interim institution is
the surviving charter of a merger with another insured depository
institution. See 12 CFR 303.62(b)(2) and the FDIC's Statement of
Policy on Bank Merger Transactions (section 4.2). Additionally, any
depository institution whose insured status is continued pursuant to
section 4 of the Federal Deposit Insurance Act is not required to
apply to continue its insured status. 12 U.S.C. 1815, 1814.
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An insured depository institution which wishes to continue its
insured status after withdrawing from the Federal Reserve System, or
when converting from a mutual to a stock form of ownership by the
chartering of an interim savings association under the provisions of
section 10(o) of the Home Owners Loan Act, also must file an
application with the FDIC for deposit insurance.

Procedures

Forms and instructions for applying for deposit insurance may be
obtained from any regional office of the FDIC Division of Supervision
(DOS). Completed applications should be filed with the appropriate
regional office as that term is defined in Sec. 303.2(g) of the FDIC's
rules and regulations. Organizers and incorporators (collectively,
``incorporators'') of proposed new depository institutions should file
their applications with the FDIC and the appropriate chartering
authority at the same time. Information provided to the chartering
authority that is also needed as part of the deposit insurance
application may be provided to the FDIC by appending a copy of the
information to the FDIC application. Use of the FDIC application form
is optional; however, the material submitted to the FDIC must contain
all information requested in the FDIC application form, unless the FDIC
otherwise indicates. In addition, all incorporators must sign and
submit the signature page of the FDIC's deposit insurance application
form, even if the application itself is not being used. It is strongly
recommended that a representative(s) of the organizing group meet with
the chartering authority and the FDIC prior to filing an application to
reach an understanding of the information requirements of each agency.
This practice typically facilitates processing and eliminate
unnecessary delays. Information requirements may not be as extensive
for applications sponsored by existing holding companies or other well
established banking groups. The FDIC may take final action prior to
final action by other regulatory authorities in cases in which the FDIC
has determined that there is no material disagreement on the action to
be taken.
The procedures governing the administrative processing of an
application for deposit insurance are contained in part 303, subpart B,
of the FDIC's rules and regulations (12 CFR part 303). Processing of an
application will not commence until the application is deemed
substantially complete. An incomplete application may be returned to
the applicant. The applicant must satisfy all terms of a conditional
approval prior to deposit insurance becoming effective.
These policies apply to all proposed de novo depository
institutions and operating institutions applying for deposit insurance,
with the exception of applications submitted for the sole purpose of
acquiring assets and assuming liabilities of an insured institution in
default. Policies are modified in those situations to reflect the
urgent nature of the transaction. Guidance for those situations is
contained in a separate section of this Policy Statement.
Subpart B of part 303 contains special filing and processing
procedures for a state member bank which seeks to continue its insured
status upon termination of membership in the Federal Reserve System and
for interim institutions chartered to facilitate mergers.

Proposed Depository Institutions

In considering applications for deposit insurance for a proposed
depository institution, the FDIC must evaluate each application in
relation to the factors prescribed in section 6 of the Federal Deposit
Insurance Act (hereafter the Act) (12 U.S.C. 1816). Those factors are:

The financial history and condition of the depository
institution;

The adequacy of its capital structure;

Its future earnings prospects;

The general character and fitness of its management;

The risk presented by such depository institution to the
deposit insurance fund;

The convenience and needs of the community to be served by
the depository institution; and

Whether its corporate powers are consistent with the
purposes of the Act.

In general, the applicant will receive deposit insurance if all of
these statutory factors plus the considerations required by the
National Historic Preservation Act and the National Environmental
Policy Act of 1969 are resolved favorably. Additional guidance
regarding the National Historic Preservation Act and the National
Environmental Policy Act may be found in the respective FDIC Statements
of Policy for each of these statutes.
If the proposal contemplates the simultaneous establishment of a
holding company, the application should disclose and discuss the
proposed activities of the parent holding company, as well as those of
the proposed depository institution.
Where the proposed depository institution will be a subsidiary of
an existing bank or thrift holding company, the FDIC will consider the
financial and managerial resources of the parent organization in
assessing the overall proposal and in evaluating the statutory factors
prescribed in section 6 of the Act. In such circumstances, the
application for deposit insurance should contain a copy of any
information submitted to the holding company's primary federal
regulator. Subpart B of part 303 of the FDIC's regulations (12 CFR
303.20-303.27) discusses certain expedited procedures that may be
available to eligible depository institutions or eligible holding

[[Page 44757]]

companies (as those terms are defined in the regulation).
The FDIC may conduct examinations and/or investigations to develop
essential information with respect to deposit insurance applications.
The appropriate regional director (DOS) will determine the need to
conduct an investigation and its scope. Every effort will be made to
coordinate any FDIC investigation with any investigations conducted by
other regulators.
The FDIC has formulated guidelines for evaluating deposit insurance
applications which are designed to ease administration, prevent
arbitrary judgment, and assure uniform and fair treatment of all
applicants. A discussion of these guidelines follows.

Statutory Factors

1. Financial History and Condition

Proposed and newly organized depository institutions have no
financial history to serve as a basis for determining qualifications
for deposit insurance. Thus, the primary areas of consideration under
this statutory factor are the ability of proponents to provide
financial support to the new institution, investment in fixed assets,
including lease obligations, and insider transactions. Lease
transactions shall be reported in accordance with Financial Accounting
Standards Board Statement 13 (Accounting for Leases). Applicants are
expected to provide procedures, security devices, and safeguards at
least equivalent to the minimums specified in the Bank Protection Act
of 1968 (12 U.S.C. 1881-1884).
(a) Investment in fixed assets and leases--The applicant's
aggregate direct and indirect fixed asset investment, including lease
obligations, must be reasonable in relation to its projected earnings
capacity, capital, and other pertinent matters of consideration.
Applicants are cautioned against purchasing any fixed assets or
entering into any noncancelable construction contracts, leases, or
other binding arrangements related to the proposal unless and until the
FDIC approves the application.
(b) Insider transactions--Any financial arrangement or transaction
involving the applicant and an insider(s) should be documented by the
applicant to demonstrate that: (1) the proposed transaction with
insiders is made on substantially the same terms as those prevailing at
the time for comparable transactions with non-insiders, and does not
involve more than normal risk or present other unfavorable features to
the applicant depository institution; and (2) the proposed transaction
must be approved in advance by a majority of the depository
institution's incorporators. In addition, full disclosure of any
arrangements with an insider must be made to all proposed directors and
prospective shareholders. An insider means a person who is proposed to
be a director, officer, or incorporator of an applicant; a shareholder
who directly or indirectly controls 10% or more of a class of the
applicant's outstanding voting stock; or the associates or interests of
any such person.

2. Adequacy of the Capital Structure

Normally, the initial capital of a proposed depository institution
should be sufficient to provide a Tier 1 capital to assets leverage
ratio (as defined in the appropriate capital regulation of the
institution's primary federal regulator) of not less than 8.0%
throughout the first three years of operation. In addition, the
depository institution must maintain an adequate allowance for loan and
lease losses.
The adequacy of the capital structure of a newly organized
depository institution is closely related to its deposit volume, fixed
asset investment and the anticipated future growth in liabilities.
Deposit projections made by the applicant must, therefore, be fully
supported and documented. Projections should be based on established
growth patterns in the specific market, and initial capitalization
should be provided accordingly. Special purpose depository institutions
(such as credit card banks) should provide projections based on the
type of business to be conducted and the potential for growth of that
business. Initial capital should normally be in excess of $2 million
net of any pre-opening expenses that will be charged to the
institution's capital after it commences business.
(a) Initial offering of stock--All stock of a particular class in
the initial offering should be sold at the same price, and have the
same voting rights. Proposals which allow the insiders to acquire a
separate class of stock with greater voting rights are generally
unacceptable. Insiders should not be offered stock at a price more
favorable than the price for other subscribers. Price disparities
provide insiders with a means to gain control disproportionate to their
investments.
When securities are sold to the public, the disclosure of all
material facts is essential. The FDIC's Statement of Policy regarding
use of Offering Circulars in connection with Public Distribution of
Bank Securities (61 FR 46808, September 5, 1996) provides additional
guidance. A copy of the offering circular prepared by the applicant,
the stock solicitation material and the subscription agreement should
be submitted to the FDIC when they become available.
(b) Wholly owned subsidiary of a holding company--If the applicant
is being established as a wholly owned subsidiary of an eligible
holding company (as defined in part 303, subpart B), the FDIC will
consider the financial resources of the parent organization as a factor
in assessing the adequacy of the proposed initial capital injection. In
such cases, the appropriate regional director (DOS) may find favorably
with respect to the adequacy of capital factor, when the initial
capital injection is sufficient to provide for a Tier 1 leverage
capital ratio of at least 8% at the end of the first year of operation,
based on a realistic business plan, or the initial capital injection
meets the $2 million minimum capital standard set forth in this
Statement of Policy, or any minimum standards established by the
chartering authority, whichever is greater. The holding company shall
also provide a written commitment to maintain the proposed
institution's Tier 1 leverage capital ratio at no less than 8 %
throughout the first three years of operation.
(c) Operating insured offices--If the proposal involves the
acquisition of an insured operating office or offices, the applicant
may request that the benchmark for evaluating the adequacy of capital
be an amount necessary for the newly chartered institution to be
classified as well capitalized, as defined by its primary federal
regulator. In such cases, the appropriate regional director (DOS) may
find favorably with respect to the capital factor based on a favorable
finding with respect to the following:

There is a realistic three-year business plan which
evidences stabilized operations at inception;

The proposal involves substantially all assets and
deposits attributable to the respective insured operating office(s);
and

The proponent is either an eligible holding company (as
defined in part 303, subpart B) or is a banking group that has, as
determined by the FDIC, demonstrated its ability to successfully manage
an insured depository institution. (A qualified banking group should
have an established association of at least three years. A chain
banking group which is recognized as such by the FDIC is one type of
banking group that is contemplated in this paragraph.)
(d) Stock financing by proposed officers, directors, and 10%
shareholders--Financing arrangements by proposed officers, directors,
and 10%

[[Page 44758]]

shareholders of their investments in stock of the proposed depository
institution will also be carefully reviewed. Such financing will be
considered acceptable only if the party financing the stock can
demonstrate the ability to service the debt without reliance on
dividends or other forms of compensation from the applicant. When stock
financing arrangements of proposed officers, directors, and 10%
shareholders are anticipated, information should be submitted with the
application demonstrating that adequate alternative independent sources
of debt servicing are available. Direct or indirect financing by
proposed officers, directors, and 10% shareholders of more than 75% of
the purchase price of the stock subscribed by any individual, or more
than 50% of the purchase price of the aggregate stock subscribed by the
proposed officers, directors, and 10% shareholders as a group, will
require supporting justification in the application regarding the
reason that the financing arrangements should be considered acceptable.
If the proposed financing arrangements are not considered appropriate,
the FDIC may find unfavorably on the adequacy of the capital structure.
When the proposed depository institution is being established as a
subsidiary of an existing holding company, the funding source being
utilized by the holding company for its capital contribution will be
evaluated in the context of the holding company's consolidated
operations. In such cases, the holding company's proposed leverage must
be in accordance with the guidelines of its primary federal regulator.
Loans made to purchase the stock of the proposed institution are
not to be refinanced by the newly established institution. Deposits or
other funds of the institution at correspondent banks are not to be
used as compensating balances for loans to insiders. During the first
three years of operation, cash dividends shall be paid only from net
operating income, and shall not be paid until an appropriate allowance
for loan and lease losses has been established and overall capital is
adequate.

3. Future Earnings Prospects

Before approving an application for deposit insurance, the FDIC
must have reasonable assurance that the new institution can be operated
profitably. Therefore, the incorporators will need to demonstrate
through realistic and supportable estimates that, within a reasonable
period (normally three years), the earnings of the applicant will be
sufficient to provide an adequate profit.
The applicant must also maintain its books and records in
accordance with the principles of accrual accounting.

4. General Character and Fitness of the Management

To satisfy this factor, the evidence must support a management
rating which, in an operating institution, would be equivalent to a
rating of 2 or better under the Uniform Financial Institution Rating
System.2 Since in most instances the management of a
proposed depository institution will not have an operating record, the
individual directors and officers will be evaluated largely on the
basis of the following:
---------------------------------------------------------------------------

\2\ A 2 rating under the Uniform Financial Institution System is
generally indicative of a satisfactory record of performance in
light of the institution's particular circumstances.
---------------------------------------------------------------------------

Financial institution and other business experience;

Duties and responsibilities in the proposed depository
institution;

Personal and professional financial responsibility;

Reputation for honesty and integrity; and

Familiarity with the economy, financial needs, and general
character of the community in which the depository institution will
operate.

All proposed depository institutions shall provide at least a five
member board of directors. The identity and qualifications of the
proposed full-time chief executive officer should be made known to the
FDIC as soon as possible, preferably when the application is filed with
the appropriate FDIC regional director (DOS). Prior to the opening of
the institution, proponents must advise the FDIC in writing of any
change in the directorate, senior active management, or a change in the
ownership of stock which would result in a shareholder owning 10% or
more of the total shares of either the depository institution or its
holding company.
(a) Fees and expenses--The commitment to pay or payment of
unreasonable or excessive fees and other expenses incident to an
application will reflect adversely upon the management of the applicant
institution. Fees and other organizational expenses incurred or
committed to should be fully supported.
Expenses for professional or other services rendered by insiders
will receive special review for any indication of self-dealing to the
detriment of the institution and its other shareholders. As a matter of
practice, the FDIC expects full disclosure to all directors and
shareholders of any arrangement with an insider.
In no case will a deposit insurance application be approved where
the payment of a fee, in whole or in part, is contingent upon any act
or forbearance by the FDIC or by any other federal or state agency or
official.
(b) Stock benefit plans--Stock benefit plans, including stock
options, stock warrants, and other similar stock based compensation
plans will be reviewed by the FDIC and must be fully disclosed to all
potential subscribers. Participants in stock benefit plans may include
incorporators, directors, and officers. A description of any such plans
proposed must be included in the application submitted to the
appropriate regional director (DOS). The structure of stock benefit
plans should encourage the continued involvement of the participants
and serve as an incentive for the successful operation of the
institution. Stock benefit plans should contain no feature that would
encourage speculative or high risk activities or serve as an obstacle
to or otherwise impede the sale of additional stock to the general
public.
Listed below are factors that the FDIC will consider in reviewing
stock benefit plans:

The duration of rights granted should be limited, and in
no event should the exercise period exceed ten years;

Rights granted should encourage the recipient to remain
involved in the proposed depository institution. For example, a vesting
period of approximately equal percentages each year over the initial
three years of operation is a type of provision that would be
appropriate to ensure continued involvement. This requirement may be
waived for participants awarded only a nominal number of shares;

Rights granted should not be transferable by the
participant;

The exercise price of stock rights shall not be less than
the fair market value of the stock at the time that the rights are
granted;

Rights under the plan must be exercised or expire within a
reasonable time after termination as an active officer, employee or
director; and

Stock benefit plans should contain a provision allowing
the institution's primary federal regulator to direct the institution
to require plan participants to exercise or forfeit their stock rights
if the institution's capital falls below the minimum requirements, as
determined by its state or primary federal regulator.
Stock benefit plans provided to directors and officers will be
reviewed

[[Page 44759]]

as a part of the total compensation package offered to such
individuals.
The FDIC will closely review stock benefit plans established to
compensate incorporators. In reviewing such plans, the FDIC will
consider the individual's time, expertise, financial commitment, and
continuing involvement in the management of the proposed institution.
The FDIC will also consider the amount and basis of any cash payments
which will be made to the incorporator for services rendered or as a
return on funds placed at risk. Plans to compensate incorporators that
provide for more than one option or warrant for each share subscribed
will generally be considered excessive. It is further expected that
incorporators granted options or warrants at or near this level will
actively participate in the management of the depository institution as
an executive officer or director. On a case-by-case basis, the FDIC may
not object to additional options being granted to an incorporator who
will also be a senior executive officer.
The FDIC recognizes that there will be limited instances where
individuals who substantially contribute to the organization of a new
depository institution do not intend to serve as an active officer or
director after the institution opens for business. The FDIC generally
will not object to awarding warrants or options to incorporators who
agree to accept shares of stock in lieu of cash payment for funds
placed at risk or for professional services rendered. In such
instances, the FDIC defines funds placed at risk to include ``seed
money'' actually paid into the organizational fund and the value of
professional services rendered as the market value of legal, accounting
and other professional services rendered. Generally, warrants or
options for organizers who will not participate in the management of
the institution will be considered excessive if the amount of options
or warrants to be granted exceeds the number of shares of stock
received in repayment for funds placed at risk and/or for professional
services rendered. The granting of options to incorporators who
guarantee loans to finance an institution's organization generally
would not be objectionable, but options granted should be limited so
that the market value of the stock subject to option does not exceed
the amount of the loan guarantees (although guarantees exceeding the
amount drawn or expected to be drawn will not be considered). When
continuing service is not contemplated, the FDIC will not require
vesting or restrictions on transferability, but will review the
duration of the rights, exercise price, and exercise or forfeiture
clauses in the same manner as discussed above.
In evaluating benefit and compensation plans for insiders, the FDIC
will look to the substance of the proposal. Those proposals that are
determined to be substantially stock based plans will be evaluated
based on the foregoing stock benefit plan criteria. Stock appreciation
rights and similar plans that include a cash payment to the recipient
based directly on the market value of the depository institution's
stock are unacceptable.
If the proposal involves the formation of a de novo holding company
and a stock benefit plan is being proposed at the holding company
level, that stock benefit plan will be reviewed by the FDIC in the same
manner as a plan involving stock issued by the proposed depository
institution.
In some instances, the exercise of rights granted by a stock
benefit plan will trigger the requirements of the Change in Bank
Control Act of 1978, section 7(j) of the FDI Act (12 U.S.C. 1817(j)).
The approval of an Application for Deposit Insurance which includes a
description of stock benefit plans does not satisfy the prior notice
requirements of the Change in Bank Control Act, if the exercise of
rights would trigger the prior notice requirement.
(c) Background and biographical information--Proposed directors,
officers, and 10% shareholders must file financial and biographical
information in connection with the deposit insurance application. The
FDIC may request a report from the Federal Bureau of Investigation or
other investigatory agencies on these individuals. Fingerprinting of
individuals may be required. Background checks and fingerprinting may
be waived by the appropriate FDIC regional director (DOS) for
individuals who are currently associated with, or have had a recent
past association with, an insured depository institution. When the
proposed depository institution is being established as a wholly owned
subsidiary of an eligible holding company, the appropriate FDIC
regional director (DOS) may waive financial information for those
persons who are being proposed as directors or officers of the
applicant. Background checks conducted by other federal financial
institution regulators in connection with charter applications are
generally adequate for the FDIC if the other regulators agree to notify
the FDIC of instances in which further investigation is warranted.
In the event any present or prospective director, officer,
employee, controlling stockholder, or agent of the applicant has been
convicted of any criminal offense involving dishonesty, breach of
trust, or money laundering, or has agreed to enter into a pretrial
diversion or similar program in connection with a prosecution of such
offense, the applicant must obtain the FDIC's written consent under
section 19 of the Act (12 U.S.C. 1829), before any such person may
serve in one or more of those capacities. Guidelines regarding section
19 applications may be obtained from the appropriate FDIC regional
office (DOS).
Proponents should be aware of the prohibitions against interlocking
management officials which are applicable to depository institutions
and depository institution holding companies and which are contained in
the Depository Institution Management Interlocks Act (12 U.S.C. 3201).
(d) Fidelity insurance, policies, and audit coverage--An insured
depository institution should maintain sufficient fidelity bond
coverage on its active officers and employees to conform with generally
accepted industry practices. Primary coverage of no less than $1
million is ordinarily expected. Approval of the application may be
conditioned upon acquisition of adequate fidelity coverage prior to
opening for business.
Applicants are expected to develop appropriate written investment,
loan, funds management and liquidity policies. Establishment of an
acceptable audit program is required for proposed depository
institutions. Applicants for deposit insurance coverage are expected to
commit the depository institution to obtain an audit by an independent
public accountant annually for at least the first three years of
operation. The FDIC may determine,3 on a case-by-case basis,
that a separate audit is unnecessary where the applicant is owned by a
holding company and the proposed depository institution will undergo an
audit performed by an independent public accountant as part of an audit
of the consolidated financial statements of its parent company.
---------------------------------------------------------------------------

\3\ ln a situation in which the FDIC is not to be the primary
federal regulator, these determinations will be made in consultation
with the primary federal regulator.
---------------------------------------------------------------------------

In order to resolve this factor favorably, the FDIC must be assured
that the proposed institution does not present an undue risk to the
Bank Insurance Fund or the Savings Association Insurance Fund. As a

[[Page 44760]]

general matter, the FDIC interprets this factor very broadly. In making
its determination, the FDIC will rely on any information available to
it, including, but not limited to the applicant's business plan. The
FDIC expects that an applicant will submit a business plan commensurate
with the capabilities of its management and the financial commitment of
the incorporators.4 Submission of an unsound business plan
will unfavorably impact the finding concerning this factor. An
applicant's business plan should demonstrate the following:
---------------------------------------------------------------------------

\4\ Any significant deviation from the business plan within the
first three years of operation must be reported by the insured
depository institution to the primary federal regulator before
consummation of the change.
---------------------------------------------------------------------------

Adequate policies, procedures, and management expertise to
operate the proposed depository institution in a safe and sound manner;

Ability to achieve a reasonable market share;

Reasonable earnings prospects;

Ability to attract and maintain adequate capital; and

Responsiveness to community needs.
Operating plans that rely on high risk lending, a special purpose
market, or significant funding from sources other than core deposits,
or that otherwise diverge from conventional bank related financial
services will require specific documentation as to the suitability of
the proposed activities for an insured institution. Similarly,
additional documentation of plans is required where markets to be
entered are intensely competitive or economic conditions are marginal.

6. Convenience and Needs of the Community to be Served

The essential considerations in evaluating this factor are the
deposit and credit needs of the community to be served, the nature and
extent of the opportunity available to the applicant in that location,
and the willingness and ability of the applicant to serve those
financial needs.
The applicant must clearly define the community it intends to serve
and provide information on that community, including economic and
demographic data and a description of the competitive environment. The
applicant should also define the services to be offered in relation to
the needs of the community. The proposed depository institution's
Community Reinvestment Act documentation, including any applicable
public file information, prepared in accordance with the requirements
of the institution's primary federal regulator, is an important part of
the FDIC's evaluation of the convenience and needs of the community to
be served.

7. Consistency of Corporate Powers with the Purposes of the Act

(a) National banks and Federal savings associations--Generally the
FDIC will presume that a proposed national bank's or federal savings
association's corporate powers are consistent with the purposes of the
Act.
(b) Insured state banks and state savings associations--Pursuant to
section 24 of the Act (12 U.S.C. 1831a), no insured state bank may
engage as principal in any type of activity that is not permissible for
a national bank, unless the FDIC has determined that the activity would
pose no significant risk to the appropriate deposit insurance fund and
the state bank is, and continues to be, in compliance with applicable
capital standards prescribed by its primary federal regulator.
Similarly, section 28 of the Act (12 U.S.C. 1831e) provides that a
state chartered savings association may not engage in any type of
activity that is not permissible for a federal savings association,
unless the FDIC has determined that the activity would pose no
significant risk to the affected deposit insurance fund and the savings
association is, and continues to be, in compliance with the capital
standards for the association. Applicants shall agree in the
application not to engage in any prohibited activities after deposit
insurance has been granted.
State nonmember banks may not exercise trust powers without the
prior written approval of the FDIC.

Operating Noninsured Institutions

This section discusses the evaluation of applications for deposit
insurance submitted by operating noninsured institutions. The FDIC's
criteria for evaluating applications submitted by operating
institutions are generally the same as those for proposed depository
institutions.
The FDIC must consider the seven factors found in section 6 of the
Act, which are discussed above.
The condition of an applicant institution will be determined from
all available information and will generally include an on-site
examination as part of the investigation process. Results of the
examination should reflect an institution that is fundamentally sound,
although some modest weaknesses may exist. The nature and severity of
deficiencies found should not be material, and the institution must be
stable and able to withstand business fluctuations.
Capital ratios will be calculated using financial statements
prepared in accordance with the ``Instructions-Consolidated Reports of
Condition and Income'' or ``Thrift Financial Reports'' in use for
insured institutions at the time. An applicant's capital adequacy will
be measured in relation to the capital ratios established in the
capital regulations of the institution's primary federal regulator.
Based on an analysis of the type and quality of the institution's
assets, the kind of powers exercised, the institution's funding
sources, or other factors, an initial capital level higher than the
minimum levels prescribed may be required. The analysis will include
consideration of such matters as whether the applicant is relatively
new,5 has embarked upon a substantive change in powers
exercised, or has experienced erratic growth patterns in recent years.
---------------------------------------------------------------------------

\5\ This Statement of Policy provides that the initial capital
for a proposed depository institution should be sufficient to
provide a leverage ratio of Tier I capital to total estimated assets
of at least 8% throughout the first three years of operation. This
standard shall also be applied to a recently organized institution
applying for deposit insurance.
---------------------------------------------------------------------------

As part of the application investigation process, the FDIC will
discuss with the applicant its future operating intentions. If any
change in its kind or level of activity is expected following, or as a
result of, the approval by the FDIC of deposit insurance, the applicant
may be requested to submit a plan for maintaining adequate capital in
the future.
Unless waived in writing by the FDIC, an applicant shall have a
full scope audit conducted by an independent public accountant prior to
submitting an application and shall submit a copy of the auditor's
report as part of the application.
Section 24 of the Act (12 U.S.C. 1831a) limits the powers of
insured state banks, and section 28 of the Act (12 U.S.C. 1831e) limits
the powers of state chartered savings associations. If the institution
is exercising any powers not authorized under the applicable statute,
the application should contain an agreement and plan for eliminating
the activity as soon as possible, or a separate application should be
submitted seeking the FDIC's consent to continue the activity.

An application for deposit insurance for a proposed depository
institution

[[Page 44761]]

which would be owned or controlled by a domestic governmental entity
(such as, for example, a state, county or a municipality) will be
reviewed very closely.6 The FDIC is of the opinion that due
to their public ownership, such depository institutions present unique
supervisory concerns that do not exist with privately owned depository
institutions. For example, because of their ultimate control by the
political process, such institutions could raise special concerns
relating to management stability, their business purpose, and their
ability and willingness to raise capital (particularly in the form of
true equity rather than governmental transfers). On the other hand,
such institutions may be particularly likely to meet the convenience
and needs of their local community, particularly if the local community
is currently un- or under-served by depository institutions. In view of
such considerations and the policy issues they embody, the FDIC will
closely evaluate such applications to ensure that the required
statutory factors are met.
---------------------------------------------------------------------------

\6\ Banks that are owned by foreign governments and their
subdivisions and banks that are owned or controlled by Native
American tribes or bands are distinguished from conventional
governmental units and will continue to be reviewed in the same
manner as in the past. Banks that are owned by foreign governments
and their subdivisions are entitled to ``national treatment.'' (See
International Banking Act of 1978, 12 U.S.C. 3101 et seq.). National
treatment requires that all foreign depository institutions, whether
publicly- or privately-owned, receive consistent treatment with
domestic entities when operating in the United States. This includes
eligibility for deposit insurance which is often a condition of
either a state or federal charter. Native American tribes or bands
that own or control depository institutions can also be
distinguished from a conventional governmental unit that seeks to
open or acquire a depository institution. This is because under
federal law, Native American tribes and bands function as both
governmental and economic, for-profit entities. The Indian
Reorganization Act of 1934 (the IRA) (25 U.S.C. 461 et seq.)
authorizes not only the creation of tribal governments (see section
16 of the IRA, 12 U.S.C. 476), but also provides for the creation of
tribal business corporations pursuant to section 17 of the IRA (25
U.S.C. 477). At the same time, however, a tribal government
organized under section 16 of the IRA is not precluded from engaging
in business activities. See S. Unique Ltd. v. Gila River Pima-
Maricopa Indian Community, 138 Ariz. 384, 674 P.2d 1376 (Ct. App.
1984). These legal and policy considerations unique to these two
categories of insurance applicants outweigh any concerns that the
FDIC may have regarding the ownership of such depository
institutions by governmental entities.
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Proposed Depository Institutions Formed for the Sole Purpose of
Acquiring Assets and Assuming Liabilities of an Insured Institution
in Default

Because of the urgent nature of this type of transaction, the
procedures described above for insuring proposed depository
institutions are modified when the institution is being formed for the
sole purpose of acquiring assets and assuming liabilities of an
institution in default. Such institutions are approved based on the
statutory factors contained in section 6 of the Act; however, the
procedures for resolving these factors are modified significantly.
The evaluation of the statutory factor "financial history and
condition" will be based to a great extent on the quality of assets
purchased and the types of liabilities assumed in the transaction.
The minimum capital requirement for these transactions is such that
the acquiring depository institution would be "adequately
capitalized," as defined in the capital regulations of its primary
federal regulator, which should be augmented by an adequate allowance
for loan and lease losses. It is emphasized that this is a minimum
standard, and a higher capital level may be required. The initial
capital requirements may be based on a realistic projection of the
estimated retained deposits. However, the proposed depository
institution will be required to provide a written commitment to achieve
the minimum capital position shortly after consummation if the volume
of deposits is underestimated.
Proponents should contact the appropriate FDIC regional office
(DOS) as soon as possible if they are interested in acquiring assets
and/or assuming liabilities of an institution in default. Due to the
time constraints involved with this type of transaction, information
submissions and applications will be abbreviated. Generally, a letter
request accompanied by copies of applications filed with other federal
or state regulatory authorities will be sufficient. Other information
will be requested only as needed by the appropriate FDIC official.

Relationships With Other Federal Regulators

Nothing in these guidelines is intended to relieve the applicant of
any requirements imposed by a depository institution's primary federal
regulator. Any differences in requirements of the FDIC and the
institution's primary federal regulator will be resolved during the
investigation process.